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The Best Way to Fund a Startup

by Sentient

Put in the work

Many factors play a role in the ability to create and run a business, and the road to entrepreneurial success can be quite daunting. Having enough capital to get your organization off of the ground and maintain momentum during challenging times is critical. After several months of creating a solid business plan, many entrepreneur’s enthusiasm will quickly wane upon being confronted with the bottom line. Don’t store your plans away in your desk drawer – in the abyss of other long-forgotten dreams – just yet. Good news, there are excellent resources that can help you meet your goals and establish a solid foundation for your business. You just have to be willing to put in the work. The return on the time invested will pay off big, considering startup funding can transform your business plans into an achievable reality. 

Multiple funding options are available for you to choose from. Preparation and research will be essential in finding the right method for your business. Ultimately, your best choice for funding will depend on the needs of your organization. Some determining factors that may help to narrow down your selection will include: whether or not you qualify for particular sources of funding, if you prefer to acquire debt- allowing you to maintain full control of your company, alternatively you may rather exchange capital or services for equity.

Real talk

Before you begin your campaign to raise capital, the first thing you will want to do is revisit your business plan. Get a realistic idea of how much money you will need to pull together on your own and/or how much you will need to request from outside resources. Aim to cut any unnecessary costs. Your goal should be to acquire enough capital to start and maintain your organization, not to luxuriate with all of the bells and whistles. You will earn that in time. There are benefits to keeping startup costs low: it may inspire you to invest your own personal savings, perhaps it will make you a more favorable candidate for a business loan, and it will certainly appeal to any potential investors. Also, be sure that your financial projections are pragmatic; idealistic financial projections can easily halt your company’s growth down the line, if not bankrupt your business. 

Choose your method

Once you have a firm grasp on a viable dollar amount, it’s time to consider sources of capital to pursue. Essentially, there are two types of funding options: debt and equity, unless you will be using your own personal funds. Of course, there are advantages and disadvantages to each method.

  • Debt: An advance of funds is a great way to ensure that all profits and assets remain with you and your business. Although you will initially go into debt, once your debt is paid all profits go directly to you and you will remain in full control of your business. However, the inability to repay your debt could cost you your business, reputation and more. In addition, not everyone has the ability to obtain a loan, whether that be via a financial institution or from friends and family. If obtaining a loan appeals to you, try reaching out to these potential sources.
    • Friends and Family
    • Financial Institutions
    • Angel Investors
    • Venture Capitalists
    • SBA: matching small businesses with lenders
  • Equity: Selling shares in your company in exchange for capital or services is a popular method for raising funds. In lieu of qualifying for a loan, an innovative idea and well laid out business plan can get you the financial resources needed to accelerate the momentum of your startup. Avoiding debt helps to reduce personal risk and increases peace of mind. Note, some may consider sharing in profits and ideas on how the business should be managed, to be a drawback when choosing this approach. The amount of resources available to you are numerous. Here is a list of potential investors that could believe in your vision so much, they want a piece of the action.
    • Friends and Family
    • Crowdfunding
    • Angel Investors
    • Venture Capitalist
    • Business Partner(s)
    • Other companies or individuals willing to trade their services for a stake in your company
  • Personal savings: If you are fortunate enough to have personal savings that will allow you to successfully create, run and sustain your business, this is a wonderful option. Not only will you avoid accruing any debt, you will also be able to solely reap the rewards of your time and financial investment. Many entrepreneurs enjoy the full control that comes with using their own financial resources to fund their business. Keep in mind, with this method the control is yours but the personal risk is yours as well. Many startups do not make it to the fifth year of business. It is quite possible to lose your nestegg. 

Don’t go it alone

The search for funding can be extremely competitive and you will face rejection, many times. Don’t give up. The funds are out there, all you will need to do is figure out how to get them. Whether you decide to use your personal savings, secure a loan, exchange equity or utilize multiple methods of raising capital for your business, bringing in the right attorney for your startup is paramount. Sentient Law is your resource for all startup legal services. Matthew Rossetti is here to guide you though taking the proper steps and precautions that will ensure your business is built on a solid foundation and is prepared to withstand any internal shifts and external pressures.

  • Entity Planning, Selection, and Formation
  • Contracts and Agreements
  • Dynamic Equity Agreements
  • Deferred Compensation Plans (Employee Stock Ownership Plans, Stock Appreciation Rights, etc.)
  • Alternative Dispute Resolution (Arbitration and Mediation)
  • Labor and Employment
  • Slicing Pie Lawyer 
  • Executive Estate Planning
Set up an Appointment with Matt on Calendly.com
Dynamic Equity/entrepreneurship/Slicing Pie/startup/Uncategorized
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Top 3 Asset Protection Strategies

by Sentient

Startup Asset Protection

Best-laid plan

We all dream of our chance at success. For many American people today, this dream isn’t limited to owning a home, having a couple of vehicles in the garage, mounds of wealth, and raising a big family. Though, success may still include some, if not all of the previously mentioned, owning a business and being your own boss is the new standard for success. There is nothing more thrilling than taking life by the reins and directing it towards one’s own vision. Many hopeful entrepreneurs are jumping right in, taking brave steps, starting their own companies. And while there are no limits to the success that could be achieved, there are also no guarantees either. Most startup businesses fail because their plans never included planning to fail. It is only when we truly take into consideration the possibility that all may not go according to plan, that we can plan accordingly. If you are in the beginning stages of planning your business, this is great news. you can safeguard your company and personal assets from the very start. For those that are already well into the day-to-day grind of running your company, rest assured, It is never too late to take action in protecting your business assets. It is always advisable to consult an attorney before making any major business decisions. Attorney, Matthew Rossetti, is an expert in startup business formation and asset protection. He will assist you in creating the ideal strategy for your organization’s specific needs. Here are three top asset protection strategies to give you a solid start in safeguarding your assets.

1. Just business, nothing personal

Bootstrapping a business is the method many entrepreneurs, with little to no outside resources, take to get their organizations up and running. Understandably so, most of these individuals start operating as a sole proprietorship due to a lack of funds. Regrettably, a sole proprietorship will not protect your assets, leaving you completely vulnerable to creditors and lawsuits. An individual may stand to lose everything, in the blink of an eye. Don’t put your house, car, savings, and other personal assets in jeopardy. It is paramount that you make a clear distinction between your personal and business assets from the very start. Limiting your personal liability is done by simply forming a Corporation, Limited Partnership (LP), or Limited Liability Company (LLC). This may cost a little more upfront but it is affordable and will be money well invested, ensuring the success of your business and peace of mind. A business entity operates as a “person” who engages in business and is put at risk doing business, it can file for bankruptcy if need be, as well as sue or be sued. Don’t let that “person” be you. If the business fails you are able to protect yourself with limited liability or a corporation.

2. Insurance + Insurance

Business insurance is crucial, regardless of the size of your business. Be sure to include it in your startup budget. This will be deductible as a business expense for the year’s taxes. There is a broad range of insurance options to choose from. Due diligence must be used when selecting the correct insurance policy for your particular organization’s needs. In your exploration, you will find options for liability insurance, property insurance, business interruption insurance, third party liability insurance, directors and officers errors, and omissions insurance, and much more. Insurance gives you the ability to take care of incidents that may arise in your business and in its dealings, as well as provide liability coverage in case of a lawsuit. Whichever type of insurance you choose, understand that it must be owned by the entity, not by you, the individual. Never mix the company’s insurance with your personal insurance. For example, the car that you use for work should be insured through the entity, not grouped in with your standard home and car bundle insurance packages. 

Once you have acquired adequate business insurance you will want to include a fail-safe plan, umbrella insurance. This type of insurance functions as an umbrella over any other insurance policies that you may carry. It is meant to provide coverage for everything that your other insurance policies missed.  When your existing policies cannot cover settlements, umbrella insurance can help you avoid wage garnishment and asset seizures. However, do keep in mind, it will not cover any negligent, criminal, or reckless activity. 

3. The backup plan

Having a risky occupation or lifestyle can increase the potential of vulnerable assets. If you have taken all of the above measures and still have some concerns about keeping your personal and business assets protected, we have listed a few alternatives for your consideration:

  • Hold valuable assets in your spouses name

In most states, assets can be shielded from a spouse’s creditors, if they are placed in the name of the other spouse. With this type of asset protection in place, the separate property of a spouse cannot be touched. Please keep in mind, this strategy can backfire when it comes to the division of property during a divorce.

  • Place them in an Asset Protection Trust (APT)

Although extremely complicated, an APT is probably one of the best moves you can make. This exists to specifically hold an individual’s assets with the purpose of shielding them from creditors. Furthermore, lawsuits and judgments will have little to no effect on your assets. There are two types of asset protection trust;

Revocable which comes with many benefits, as it can be changed and altered but this does not offer full protection.

Irrevocable which is the best choice for protecting your asset, however, it can never be changed and you will have little control over the trust assets.

  • Create separate entities to hold your assets

Businesses often hold assets in separate companies. Doing this provides liability protection and tax concessions. The holding company is not responsible for any of the business activities, making the liability of the operation less likely, thereby protecting your assets. Often, the owners of the company holding the assets are not the same as the owners of the operational business. Assets are usually being held by a group of investors or an asset holding company. That being said, you can operate your separate entity in the same way. Putting real estate or other investment assets into a limited partnership (LP), you can essentially protect your assets to the same degree.

 

Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30-minute consultation for guidance.

Set up an appointment with Matt on Calendly.com

 

Dynamic Equity/entrepreneurship/Slicing Pie/startup/Uncategorized
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How to be a Startup CEO

by Sentient

Laying the groundwork for success

A board of directors is tasked with making one of the most paramount decisions for their organization, selecting the chief executive officer (CEO). Although the board of directors is the supreme governing authority of the company, the CEO holds one of the most important roles within an organization. This individual will lead the institution in developing its vision, tone, culture, long-term strategy, and increasing shareholder value. Not to mention, a CEO is generally responsible for routine day-to-day business decisions that can make or break a venture. A successful CEO will need to put their ego on the shelf, roll up their sleeves, and be willing to do whatever needs to be done. As a startup CEO, prepare to be particularly hands-on and heavily involved in the day-to-day functions of the company. It is commonly said that startup CEOs wear all hats. This role will be demanding, responsibilities will be unending, and the struggles will be unexpected. 

Check it out: Learn more about Partnerships!

Understand the Role of a CEO

It is a popular belief that CEOs only deal with high-level corporate strategy and major corporate decision making. While that is often true for larger companies, a startup CEO must have an apt ability for both higher and lower level decision making. He/she will be held accountable for the performance and results of the company and must work to satisfy internal goals, external shareholders, and increasingly the public. This role will encompass making judgments and tough calls along with having a strong connection with the frontline of the business. Choosing the right CEO for a startup has huge benefits for the long-term success of a company. In this ever-changing work environment, the expectations of a CEO have become highly dependent on what is commonly referred to as soft skill: having strong interpersonal skills and a high EQ (emotional quotient) are now additional strengths needed to be a successful CEO. The responsibilities you will take on as a startup CEO will give you all of the tools needed to lead a successful venture while standing shoulder-to-shoulder with your team.

Does your CEO have what it takes?

  • Strong leadership skills
  • Approachable and personable
  • Communication and transparency
  • Invests time into company culture (being active and present)
  • Committed to the company mission
  • Willingness to provide leadership and professional growth opportunities for employees

Startup CEO Responsibilities are Far-reaching

The CEO of an organization is accountable for far more than ensuring substantial profits and making sound investments for the future of the company. They should have a clear perspective across the organization as well as accountability for the consumer. It is important to focus on the satisfaction of all stakeholders in the business, not only the investors and shareholders but employees, customers, suppliers, and most importantly the consumer. A successful CEO will know, it is critical to concentrate attention on both internal and external organizational factors. The ultimate goal is winning over the consumer. After all, what good are products and services that no one wants to use or be affiliated with?

Check it out: Top 5 Online Business Ideas!

Typical CEO Responsibilities

  • Provide inspiring leadership inside and outside of the company
  • Create an environment that promotes great performance and positive morale
  • Decide on a strategic direction for the company 
  • Make high-level decisions about policy and strategy
  • Develop and implement the organization’s operational policies, culture, its overall vision and mission
  • Lead in the development of the company’s short and long-term goals, making sure they are measurable and describable
  • Maintain a clear direction for the company
  • Remain focused on company goals
  • Oversee day-to-day operations
  • Be aware of competitive markets, industry developments, and expansion opportunities 
  • Find acquisition opportunities 
  • Oversee the company’s fiscal activity including budgeting, reporting, and auditing
  • Ensure risks are monitored and minimize
  • Maintain high social responsibility wherever the company does business
  • Act as the spokesperson for the company, be the public face
  • Create a business network
  • Build alliances and partnerships with other organizations
  • Communicate on behalf of the company with the public, shareholders, government entities, etc.
  • Carefully make hiring decisions (try to recruit talent who are smarter than you)
  • Report to the board of directors and keep them informed
  • Evaluate the work of others within the company including leaders, directors, vice president, and president
  • Work with senior stakeholders, chief financial officer, chief information officer, and other executives.
  • Manage your board and listen to them carefully
  • Believe in and trust the expertise of others
  • Ask questions of yourself and others, at all levels
  • Delegate effectively
  • Assure legal and regulatory documents are filed and monitor compliance with the laws and regulations
Style Shifting: The Struggles of a Triumphant CEO

While it is extremely rewarding to watch your company grow and thrive, a startup CEO will face some challenges in the shifting of their style as the business flourishes. In the company’s infancy, responsibilities seem limitless; a startup the CEO must be willing to do anything and everything. When the company evolves into an organizational ecosystem comprised of multiple departments and hundreds of team members, it is impossible to continue to maintain that role. Thus, the CEO must evolve as well. By now this individual has laid a solid foundation for the organization and a direct path for a successful venture. However, the next steps can be some of the most difficult challenges a chief executive officer will face. Stepping back, delegating responsibilities to team members, and letting go of some control can be cause for extreme consternation. Great leaders must learn to zoom out and stop doing everything. It is time to be confident in the painstaking strategizing, planning, and managing that has already been implemented. The best CEOs know or learn that, although they may make most of the final decision, those decisions should be informed by the advice of subject matter experts. Assuming a CEO has the right people in place, when in doubt delegate.

Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30-minute consultation for guidance.

Set up an appointment with Matt on Calendly.com

 

Dynamic Equity/entrepreneurship/Slicing Pie/startup/Uncategorized
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Business Partnerships

by Sentient

Partnerships

Partnerships can create an opportunity for your business to grow and thrive. Sentient Law knows that the ins and outs of such a venture can be challenging for many business owners. Attorney, Matthew Rossetti, is the premier “Slicing Pie” expert in the United States; he will ensure that you structure your partnership right from the very beginning. Whether you are building your business from the ground up or looking to add a partner to your existing business, he will guide you through the entire process. Here, we’ve provided some key information to help ease you through the nuances of understanding partnerships. 

Making it legal

A formal, legal agreement between you and your partner(s) will allow you to manage and operate your business as co-owners. You will also share in the profits and liabilities. It is important to be safe, be good, and be prepared. Sentient Law uses a custom dynamic business formation model to create a perfectly fair equity split in the early stages of a company. This makes sure that everyone owns the percentage of the business that they deserve. In other words, you get out what you put in.  This is achieved by calculating the input values of each partner. Monetizing and verifying the value you have brought to the company incentivizes each partner to contribute to the business. Setting up this organic agreement means you’ll never have to concern yourself with wondering how to fairly and proportionally divide your company’s ownership.

There are several types of partnership arrangements

Be sure to explore and choose the most suitable arrangement for your business. The most important types of partnerships to consider are:

  • General Partnerships:  All partners represent the company when dealing with outside parties. Each partner has equal control and the right to participate in decision-making and the management of the business. Furthermore, the risks and returns are distributed equally, unless otherwise stated in your partnership agreement.
  • Limited Partnerships (LP): A limited partner has no authority and will not earn equal returns. Their personal assets are protected by limited liability in legal situations, unlike a general partner. Not to be confused with Limited Liability Partnership (LLP). 
  • Limited Liability Partnerships (LLP): This is a popular business formation because it allows for collaboration without holding all partners responsible for one partner’s mistakes. In this type of structure, some or all of the parties have limited liability, protecting their personal assets if legal issues arise.
  • Joint Liability Partnerships: In a joint liability partnership, all partners are equal. They share in all the responsibilities of the business, including liability for financial and legal issues.
  • Several Liability Partnerships: This is a complex arrangement. The weight of responsibility can shift, depending on the specific duties and responsibilities of each partner. Liability could fall to a partner for lack of due diligence and the legal responsibilities can be divided depending on where the obligation lies. 

Who’s who and what’s what?

Going into a partnership can leave you a bit confused as to what your role is in the company. To clear things up, here are some terms that may help you understand your role and may serve as a guide when seeking out potential partners.

  • Founder: The person or persons that created the company. The owner is not necessarily the founder. Your new partner can be an owner as well, however, if you forged this entity you are the founder.
  • Investor: Any person, company, or entity that invests capital into a business and expects to earn a rate of return. An investor may put money into the business or purchase stocks from other investors. The main objective is to maximize profits and minimize risk. Investors may contribute with labor, provide loans, buy shares, or perhaps even guarantee to pay creditors.
  • Angel Investor: Typically wealthy, these are individuals that provide a startup with seed money or capital for expansion, in exchange for ownership or equity. They are often willing to invest hundreds of thousands of dollars into a business if they believe they will reap the rewards of your success. However, angel investors are not always motivated solely by making a profit. These are often professionals that are well into their careers and are inspired to give something back and driven by doing a good deed for an aspiring entrepreneur. Angel investors are often referred to as informal investors, angel funders, private investors, seed investors, or business angels.
  • Equity Stakeholder: Although stakeholders are commonly thought to be large inventors that can afford to hold a viable stake in a company, there is much more to be considered. In actuality, anyone that invests in a company and whose actions determine the outcome of its business decisions is a stakeholder.  These investors have a long-term interest in the performance of the company. They don’t have to be actual equity holders, they can be shareholders, creditors and debenture holders, employees, customers, suppliers, the government, and more. Simply put, stakeholders rely on the success of a business to keep the supply chain going.

It’s never too late to start using the “Slicing Pie” approach

You may already have an existing partnership agreement. Due to ever-changing life events, your existing agreement may no longer be the right fit for you and your partners. If you have an LLC and it is pre-revenue, amending your agreements is straightforward and simple for Sentient Law. Depending on the circumstances, almost all partnership agreements can be amended with the consent of all parties involved. Matthew Rossetti will work with you to create a perfectly fair and balanced agreement and equity split. Set up a 30-minute consultation today to discuss how he can help you.

Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30-minute consultation for guidance.

Set up an appointment with Matt on Calendly.com

 

Dynamic Equity/entrepreneurship/Slicing Pie/startup/Uncategorized
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Top 5 Online Business Ideas – Start-Up Edition

by Sentient

The Time and Money Conundrum

When you have the money you don’t have the time when you have the time you never seem to have the money. So many people, like yourself, have been baffled by this conundrum for so long. You work long, stressful hours to make the type of money that would allow you to grow your family or take those amazing vacations that you’ve been fantasizing about. Now that you’ve stockpiled your earnings and are ready to start planning, you realize that you can’t afford the time because you have sacrificed time for money. On the occasion that you have as much free time as anyone could ever hope for, you find yourself wishing that you had the type of career that could bankroll your wanderlust or support your desire to focus on family. Alas, you come to realize that you have sacrificed money for time. Having to choose between time and money would be a tough pill to swallow if you had to. Contrary to popular belief, you don’t have to.

Buying Time Freedom and Independence

Creating an online business can bring you the type of lifestyle and financial freedom you’ve been longing for! You can become a highly active full-time entrepreneur or keep your workload light by sharing some of the responsibilities with a partner. The greatest thing about having an online business is anyone can do it from almost anywhere. The sky’s the limit.

Business Partner and Being Prepared

Many entrepreneurs enjoy the thrill of being highly active and fully involved in the day-to-day of their business. It can be very rewarding to be the face and voice of your company by handling your own sales and marketing, along with networking and cultivating great relationships with your clients. There is also a sense of security when it comes to being the sole person in charge of accounting and finance. Going it alone has its perks for those that are great at managing their time and understand the skills needed to provide your business with a solid foundation.

For some, handling all aspects of the day-to-day grind can seem overwhelming or in time, become overwhelming as your business starts to take off. A lot of people work better in teams, consider having a business partner to share some of the load. Partnerships provide an opportunity for you to focus on your strengths and to draw from someone else’s expertise, in areas that you are not highly skilled. In many instances, startups are unable to pay people upfront. It will be important to figure out when and how you will do that, once your company starts to see profits. Sentient Law specializes in using a dynamic equity framework to fairly distribute equity to your startup team. This allows partners to calculate the value of their time, making sure everyone is compensated fairly.

Get your wheels turning with these Top 5 Online Business Ideas.

  1. Digital Products or Courses
  2. Virtual Coaching
  3. Dropshipping
  4. Box Subscription Business
  5. E-commerce Retailer

Removing Mental Roadblocks

Even though we are all constantly using online products and services, when it comes to launching a personal online business it can be intimidating. Self-doubt can quickly stifle your enthusiasm and bring creating and planning to an immediate halt. Why not you? You have all of the skills required to create and grow a successful online business. The first thing you must do is open your mind.

While it is true that you should work with what you know, just because you are in finance, does not mean your online business needs to have anything to do with finance. Explore other areas where you are knowledgeable. For example, you may also know what a great shave should consist of. In that case, you could sell amazing razors, and other shave tools and products. Think outside the box.

Another hurdle that people tend to face is the notion that their online business should spark from some sort of deep and meaningful passion. As lovely as that sounds, if you are someone who has had a career for at least five years, you probably already know, deep and meaningful careers can become just as daunting and monotonous, as with any other. Focus more on what will bring you the type of income that would allow a deep and meaningful life. Remember, money is a tool to buy time, freedom, and independence.

What’s the Right Business for Me?

Ask Yourself These Questions:

  • What am I good at?
  • What do I know?
  • What type of lifestyle do I want to lead?
  • What do I want my day to day to look like?
  • How much am I willing to invest in my business (multiply by 3)?
  • What do I know about this product or service?
  • Do I want to do this on my own?
  • Do I want or need a partner(s)?
  • Will I have employees?

What Are You Waiting For?

There couldn’t be a better time than right now, to start your online business. You have already proven to yourself that you are ready to take the first steps in owning your own business by visiting our website and reading this blog. By now, you understand that it is possible to have freedom and independence when it comes to both your money and your time. After clearing some common mental roadblocks, your mind is open to opportunities you’ve never thought of before. You are armed with 5 fantastic online business ideas and hopefully, you have come up with a few of your own. Questions have been asked and answered as to some of the specifics about your new business and you are ready to take the next steps. Now it’s time for you to make it official and choose the best business formation for your new company. Sentient Law is here to walk you through the process and answer any questions that you may have.

Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30-minute consultation for guidance.

Set up an appointment with Matt on Calendly.com

 

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Top 3 Business Formation Options

by Sentient

Giving Your Start-Up a Head Start

It’s time to commit to that great business idea you’ve been fantasizing about. This is a brave and bold move. Although you will face many challenges, watching your company grow and succeed will be extremely rewarding.

By now, you’ve Googled how to start a business, done your research, hopefully started a business plan and financial plan. Now you’ll need to determine your business structure. This is a very important step in the process and can be a bit confusing. It is always wise to reach out to a knowledgeable business attorney who can help you select the business structure that best meets your unique needs.

There are several business structure options to choose from. This decision will significantly impact your business profit, liability and taxes. You can always reevaluate and change your business structure as your business grows and needs change. Getting the assistance of an attorney, capable of navigating the nuances of business formation will ensure that your amazing business idea is set-up for success from day one.

To get started deciding which business structure best fits your needs and goals, here are the 3 Top Business Formation Options.

  1. Limited Liability Company (LLC):
    • Owners of an LLC are called members rather than partners or shareholders. You can form an LLC with only one member, like a sole proprietor (without the personal Liability), or with multiple members.
    • This type of business formation carries with it similar benefits of both a Corporation and a Limited Liability Partnership (LLP), without some of the burdens those business structures may involve.
    • Similar to a corporation, an LLC is a separate entity from the owner, providing legal and financial protection. This protection allows an owner to avoid taking on the personal responsibilities for any debt or liabilities of their business.
    • Most small business start-ups will open as an LLC rather than a corporation. Forming an LLC is generally less expensive to start, has less formalities and you don’t have to pay corporate taxes on top of individual taxes. Limited Liability Companies share the same tax benefits as an LLP, where each member is taxed based on the owner’s individual income.
  2. Corporation
    • A Corporation is a company or group of people that are authorized to act as a single entity. This option is preferred by companies who are looking for outside investors or who want to take their company public.
    • Forming a corporation is essentially creating a person (legally a person). It is not a human being of course, but it is a single entity, that has a lot of the same rights and obligations of a person. This ‘person’ has a name, must pay taxes, debts and is liable for any wrongdoings.
    • Some believe that a corporation is the most advantageous business structure. A corporation is made up of individual directors (board of directors), officers and its members, called shareholders, which own a percentage of the business or stocks. This single entity is separate from the owners, providing legal and financial protection to its members, similar to an LLC.
  3. Limited Liability Partnership (LLP)
    • The main advantage of an LLP is that all partners are protected by some form of liability protection. An LLP is basically a general partnership, but it gives the partners some limited personal liability. In this jointly-owned business, two or more people agree to share in all assets, profits and financial and legal liabilities.
    • It is similar to an LLC in many aspects, including how individual owners are taxed. The structure does differ in that an LLP must have a managing partner that is liable for the actions of the partnership.
    • It is important to be aware that some states recognize LLPs formed in other states (called foreign LLPs), and some states do not. This could affect the limitation of liability in the other states, possibly treating your business as a General Partnership. With a General Partnership, owners are left unprotected. They are personally responsible for business liabilities and debts. This means that their personal assets can be seized and partners may be sued for business debts.
    • The degree of liability limitation for an LLP varies from state to state. It is crucial to do your research and/or reach out to a qualified attorney.

Yes, these options can be confusing and there is so much more to consider when starting a business. Will you have members, partners or shareholders?  How will you divide the company? Should you have a Start-up Equity Agreement and Co-founder Equity Agreements? Fortunately there is help.

Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30 minute consultation for guidance.

Contact Matt
entrepreneurship/Issues/law/Uncategorized
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Non-Competes: Useful Or Futile?

by Sentient

By Matt Rossetti

Originally Published on Forbes.com here.

Bound by a Non-Compete?

At least half of the founders who contact me are contractually bound by some sort of covenant not to compete with a current or former employer. A covenant not to compete is a contract between an employer and employee or contractor in which the employee or contractor agrees not to work for competitors of the employer for a specific amount of time after the employee or contractor completes their service to the employer. Whether you are an employee, contractor or employer, there are three basic issues to think about when analyzing your non-compete: purpose, restrictions and enforceability.

Purpose

Non-compete agreements protect proprietary information and restrict where an employee or contractor may work during the contract — and sometimes after they complete their service to an employer.

The first purpose of a non-compete is tantamount to a non-disclosure agreement, as its goal is to keep a current or former employee or contractor from disclosing proprietary information to a third party. Proprietary information includes more than just intellectual property and can be anything from financial plans to marketing strategies and data.

The second purpose is a work restriction on the current or former employee or contractor. Work restrictions contractually limit a current or former employee or contractor from working for a competitor in the same market or geographical area for a set amount of time.

Restrictions

Non-competes are a severe restriction on commerce and an individual’s ability to make a living. Because of this, the prevailing trend is to limit or bar the enforceability of non-competes. This enforceability, however, varies greatly by state.

In states like California, non-competes are unenforceable as a matter of law if they restrict an employee or contractor’s activities after the term of the contract. There is a common misconception that non-compete clauses are still enforceable against California contractors (they are not). The relevant provision of CA’s Business and Professions Code Section 16600 states: “16600. Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Other states like Georgia provide employers specific guidelines for the enforceability of restrictive covenants Ga. Code Ann. § 13-8-53 (May 11, 2011).

When reviewing your non-compete, you should have an attorney check the laws of the state where both the employer and the employee/contractor are located for restrictions.

Enforceability

For a covenant not to compete to be enforceable, there must be some form of consideration. Consideration may come in the form of payment with something of value or money. If an agreement containing a non-compete is signed at the outset of an employee or contractor’s employment, most courts will find that continuing employment is adequate consideration for the non-compete. However, if an employer tenders a non-compete to a current or former employee or contractor without consideration, then most courts will find that non-compete invalid for want of consideration.

Because a non-compete may severely restrict an individual’s ability to make a living, the restrictions must be reasonable in scope. I recently had a software engineer present me with an independent contractor agreement that would have restricted him from performing any services as an engineer, whether indirectly or directly competitive with his employer, for five calendar years post-employment and without a geographic limitation. If enforceable, this agreement would have prevented the contractor from working as a software engineer in any capacity for five years.

While proprietary information protected by a non-compete may be broadly interpreted and include more than just intellectual property, work restrictions must be reasonable in duration and geographic location. Generally speaking, a covenant not to compete should only last for one to two years maximum. The geographic limitation should also be reasonable in light of the circumstances. While a software engineer might be restricted from working in a certain market, it is probably not fair to ask a fast food worker not to work for a competitor globally.

In many states, the employer bears the burden of showing that restrictions are both reasonable and necessary to protect against unfair competition. While some states might enforce this agreement, a state’s courts often are allowed to “blue pencil” non-compete provisions to those aspects that are absolutely necessary to prevent a competitor from gaining an unfair advantage.

Restrictive covenants like non-competes can be unenforceable as a matter of law or cause all involved significant hardship in the future. I highly encourage employers, contractors and employees to avoid using form or stock agreements that contain non-competes without a licensed attorney’s review. An ounce of prevention is worth a pound of cure.

Dynamic Equity/law/startup
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After the Equity Split: Compete or Non-Compete

by Sentient

By Matt Rossetti

Original article written for SlicingPie.com

One of the often-overlooked features of the Slicing Pie model is the logical outcomes regarding a person’s ability to compete with the startup after a separation. Getting a fair deal for everyone is more than just splitting equity correctly.

In any company, there are four basic conditions under which a person can be separated from the firm:

  1. He or she can be fired for good reason
  2. He or she can be fired for no good reason
  3. He or she can resign for good reason
  4. He or she can resign for no good reason

These are universal conditions, although they have different names in different places. In the UK and Europe, I often hear the terms “Good Leaver” for conditions B and C, and “Bad Leaver” for conditions A and D. I also hear fired or terminated for cause or no cause. Use whatever language works, the important thing is that different separation conditions have different logical outcomes when it comes to fairness. The outcomes should always do two things:

  1. Reflect the fair market value of each person’s contribution. This is their “bet.” Bets are always worth what they’re worth, they don’t have special powers.
  2. Align everyone’s interests so that each participant has incentives to act in the best interests of the business. No person should ever be given an incentive to act selfishly or greedy.

You can read what happens to a participant’s slices here, but when it comes to whether a person should be free to engage in direct competition with a former employer, it breaks down like this:

If a person is fired for good reason or resigns for no good reason, he or she should not compete with the company or solicit employees. This removes the incentive to deliberately undermine the company’s activities. For example, it wouldn’t be fair for someone to work for a startup during the proof-of-concept stage only to quit and start his or her own company once the business model is figured out.

Conversely, if a person is fired for no good reason or resigns for good reason, the company should not take any action that would hinder the person’s right to engage in competitive activity. The company can, of course, enforce patents, trademarks, copyrights and trade secrets including in-process innovations, customer lists, and other confidential information. For example, it wouldn’t be fair for someone to work for a startup during the proof-of-concept stage only to get fired once the business model is figured out and then preventing him or her from applying his or her skills and knowledge to a new company.

Enforceability

Of course, companies ask employees to sign non-compete agreements all the time and enforceability varies in different states and countries. According to Slicing Pie lawyer, Matt Rossetti: “Non-competes are a severe restriction on commerce and an individual’s ability to make a living. Because of this, the prevailing trend is to limit or bar the enforceability of non-competes.”

But legal isn’t the same thing as fair. It’s important to adhere to what is fair, even if local laws provide opportunities to act unfairly. Just because you live in a place where a non-compete isn’t enforceable doesn’t mean it’s fair to do so.

(I should note, however, that breaking the law should always be avoided.)

The Fair Logic in Action

Merrily and Anson start a lemonade stand and developed a special secret formula for making lemonade.

Scenario One: Anson slacks off on the job and, after two clear warnings, he is fired for good reason. It would not be fair for him to open a competing lemonade stand. If he wanted to be in the lemonade business, he should have corrected his behavior.

Scenario Two: Merrily decides she no longer needs Anson, so she fires him for no good reason. It would be fair for Anson to start a competing stand. If Merrily did not want this, she should have thought twice before firing him for no reason. Anson may not steal the secret formula or any other intellectual property, but he is free to come up with a new formula and go into business.

Scenario Three: Merrily decides they are going to sell kittens instead of lemonade. This is a different business, so Anson would be able to resign for good reason and, as in Scenario Two, would be free to start a lemonade stand. This probably won’t bother Merrily because she abandoned the lemonade concept, but Anson still can’t steal the secret formula. In this case, it would probably be more practical for Merrily to quit the lemonade stand, but she may want to return to selling lemonade, so she wants to retain the trade secret.

Dealing with Ideas

The next two scenarios are common sources of founder disputes because they deal with the idea upon which the company was founded.

Scenario Four (it starts getting more interesting): Let’s pretend that during the planning stage for the business Anson invented the secret formula. Merrily decides she no longer needs Anson, so she fires him for no good reason. It would be fair for Anson to start a competing stand. Anson may not use the secret formula even though it was his idea. The company owns the intellectual property (IP) he developed on the job. Anson will have to come up with a new formula to go into business.

The key legal concept here is called an assignment of rights or work made for hire. Slicing Pie logic assumes an assignment of rights. But all startups should have an assignment of rights contract or at least a clear policy in place.

Scenario Five: Let’s pretend that Anson invented the secret formula prior to starting the business with Merrily who agrees to treat the formula as a trade secret. Merrily decides she no longer needs Anson, so she fires him for no good reason. It would be fair for Anson to start a competing stand. But this does not necessarily mean Anson can extract his IP. In this case, Anson’s rights would be defined by the license agreement he has with the company. If the license agreement was exclusive, he could not use it for his new company, but he would continue to receive the fair market royalties as allocations of slices or cash. If the agreement was non-exclusive, Anson could license the IP to his new company.

Sadly, many founders with pre-existing IP don’t put an agreement in place with the new company. If you feel that you substantially own documented IP upon which a company was founded, it would behoove you to engage an attorney and do a licensing deal with the newly-formed company. This applies to trade secrets, patents, trademarks, and copyrights.

If the fair market value of time and materials were included in the Pie, it should be treated as a work made for hire and the IP would assume to be owned by the company. The owner of the IP should decide, in advance, whether developing the IP was an independent act or simply part of his or her role in the business. In most cases, a person should be able to get slices for time and materials and a royalty.

Startup companies are always changing, but Slicing Pie always delivers an objectively fair deal to participants.

Aligned Incentives

Adhering to the competition logic in Slicing Pie employees think twice before slacking off or quitting and startup managers think twice before firing someone or breaking commitments (which provides good reason to resign). People are free to make their own decisions with full knowledge of the logical consequences that will result. Any agreement that goes against this logic will provide opportunity for one party to benefit at the expense of the other—that’s not fair!

Dynamic Equity/entrepreneurship/Slicing Pie/startup
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The Truth about Slicing Pie

by Sentient

Originally Published on Forbes.com here.

Overcoming The Misconceptions Of Dynamic Equity

By Matt Rossetti

These days, most startup attorneys I meet have at least heard of the slicing pie model for equity distribution, but many have yet to use it. There are a few common misconceptions that cause them to steer clients away from slicing pie toward more conventional equity split models. In this article, I will address a few of the common concerns and hopefully dispel them as myths.

Dynamic equity is not Impossible

When I first learned about slicing pie I was, like many of my peers, skeptical of its promise to not only deliver a fair equity split but to also provide a framework for avoiding common equity disputes. I was fortunate to meet the model’s inventor, Mike Moyer, who referred a few clients and encouraged me to develop a legal solution. Since then I’ve done over 1,000 consultations on the model and it has become my default recommendation for equity distribution in bootstrapped startups.

Before trying the model, I found that no matter how carefully founders planned, at least 50% of them had a dispute over their equity split that required legal intervention within the first year or so of formation. Many of my colleagues who serve early-stage companies are all too familiar with this exceedingly common problem. In my experience, the slicing pie model has virtually eliminated equity disputes among founders and problems that do arise can usually be addressed within the framework.

There are three basic areas of concern that prevent attorneys and founders from applying the model: concerns about future issues, concerns about implementation and concerns about non-compliance with the model.

1. Concerns About Future Issues

Teams often express concerns about future issues that may arise, especially when it comes to how the model is perceived by third parties such as investors and taxing authorities. The fear is that future investors will view the model as too ambiguous or complex and that it might trigger undesirable tax events.

Having seen companies using the model grow and move through multiple funding rounds, I have yet to encounter an investor who takes issue with the model or cites it as a reason to pass on an opportunity. On the contrary, the idea that each founder is entitled to equity in proportion to their contribution is usually viewed in a positive light by investors, especially when they explore the underlying logic and cut through the perceived complexity.

A key point to consider is that not all resource consumption garners a higher valuation. For example, a company that hires a janitor to take out the trash for $20 an hour and 10 hours per week did not just become $4,400 more valuable. Similarly, since the model terminates before any major financial transactions that require a valuation, tax consequences are about the same as any other model.

2. Concerns About Implementation

The slicing pie model requires a tabulation of the fair market value of the contributions from each participant. The prospect of tracking these inputs is often distasteful for founders who relish freedom from the structure of corporate life. In practice, the model simply accounts for transactions that most companies track as a matter of course. For instance, most successful companies track payroll, expenses, sales, investments and other financial activities. A key difference, however, is that most monitoring systems are based on financial transactions and most founders do not feel the need to track non-financial events such as not getting paid or not getting reimbursed for expenses. Unfortunately, the absence of this discipline can skew the teams understanding of their own business model. Once teams understand how important this activity is, this concern is no longer a hurdle to implementation, especially given the availability of tools to manage slicing pie record keeping.

Other implementation concerns focus on the conversion of the slicing pie hypothetical split into actual ownership of shares or membership interests in the company. This process, from a legal standpoint, is quite simple and often occurs in the context of a structural change in the organization as it matures or takes on professional VC funding. Once the shares or membership interests are formally issued, they are subject to more conventional terms set by management or the angel or Series-A investor.

3. Concerns About Non-Compliance

The last major area of concern deals with a series of what-if scenarios. For example, what if a participant reports more time than they actually spend. Or what if someone demands a set percentage of shares. Most of these fall into the category of management issues, rather than an issue with slicing pie. For instance, a person who is unproductive or dishonest will eventually be terminated for good reason and the model will impose logical consequences. The slicing pie model allows managers to make rational business decisions and provides protection for all participants.

The other form of non-compliance, which is more difficult to manage, occurs when a participant attempts to renegotiate the terms of the deal in their favor, usually by holding the company hostage. A recent example from my own practice was a CTO who shut down the company’s software product and email system unless he was granted a fixed equity stake in the business. Sadly, this scenario is not completely uncommon under any framework and usually represents a situation in which one person overvalues their own contribution while undervaluing the contributions of others. Slicing pie’s alignment with fair market values most certainly mitigates this risk, yet some egos don’t respond well to logic. In my experience, a frank, lawyer-to-lawyer discussion can disarm what could otherwise be an explosive situation.

In spite of what you may or may not have heard about the slicing pie model, the most common misconceptions can be easily addressed with a concerned client. The benefits of implementing the model far outweigh any perceived problems and going with conventional methods carries far too much risk. I highly encourage anyone who counsels early-stage companies to familiarize themselves with the benefits and help clients to implement so that they can avoid the common pitfalls of unfair equity splits and the infamous founder’s dilemma.

If you are interested in using a dynamic equity framework to fairly distribute equity to your startup team, please contact us today via email to contact@sentientlaw.com or by phone at (312) 650-9087.

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